PPI Data Sends Rates Higher to End the Week

Another hot inflation reading pushed swap rates and Treasury yields higher to end the week. Rates have seesawed up and down over the past few sessions, but ended the week higher after PPI data showed input prices rose at an annualized rate of 8.3% in the month of August. The 10-year yield would ultimately climb 4 basis points on the day while the spread between 2-year and 10-year rates (a measure of yield curve steepness) widened out to 1.13% – the steepest the curve has been since mid-July. The inflation reading had an impact on risk assets as well, the S&P 500 and Nasdaq declining 0.9% and 1.6% respectively, the worse week for those indices since June.

Investor demand for U.S. Treasuries continues unabated. This past week saw strong demand for the Treasury’s 3-year, 10-year, and 30-year debt. The 30-year auction highlighted investor demand with primary dealers taking their lowest share of a 30-year bond auction ever. The strong demand in Treasuries throughout the curve has helped keep rates lower despite expectations for a Fed taper and worldwide inflationary pressures.

August’s headline producer price index (PPI) increased 8.3% year-over-year. Core PPI, which excludes food and energy also rose dramatically- the reading showing a year-over-year increase of 6.7%.  Both headline and core PPI beat economists’ estimates of 8.2% and 6.6%, respectively, and are the highest year-over-year increases since the Labor Department started tracking the data. In recent months, a confluence of issues have driven producer prices, including material shortages, supply-chain disruptions, and increasing labor expenses. Next week, the Labor Department will release its data on consumer prices which will provide insight on the pace producers are passing rising costs to their customers.